Question 18 The following questions are independent of each other. A. Expert Sha

Question

Question 18

The following questions are independent of each other.

A. Expert Sharpers Inc. has 9 percent coupon bonds on the market with six (6) years left until maturity. These bonds make annual payments. If the yield to maturity on the bond is 10 percent:

(a) What is the current price of the bond?(b) What would be the price of the bond if the yield fell to 8 percent?(c) What is the current yield of the bond at the yield to maturity of 9 percent?

Suppose you borrow $10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan?

A management company has 7 percent coupon bonds on the market with twelve years left to maturity. The bonds make annual payments. If the bond currently sells for $1,200, what is its

YTM?

D. Why do financial managers tend to evaluate investment opportunities with present value techniques?

Explanation / Answer

Part 1:

If nothing mentioned or indicated, you can assume face value of bond $1000

FV = $1000, N = 6, PMT = 1000*0.09 = $90, r = 10%

Compute PV = (90/0.1)*(1 - 1/1.1^6) + 1000/1.1^6 = 956.45

Current price of bond = $956.45 per $1000 face value

When r = 8%, PV = (90/0.08)*(1 - 1/1.08^6) + 1000/1.08^6 = 1046.23

When yield is 8%, price of bond = $1046.23

When r = 9% which is same as coupon rate, PV = FV = $1000

Current Yield = Annual Coupon / Current price = 90/1000 = 0.09 = 9%

You shouldn’t mix multiple questions in a post.

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